Key Points.
- The two biggest uncertainties facing global markets remain inflation and the war in Ukraine with the inflation likely to be over 10% in the UK by the end of the year.
- Markets are forward looking, so when inflation peaks, markets should start to recover.
- Most commodity prices are easing, wheat and corn are 30-40% down from recent peaks, whilst copper is down over 20% this year. These falls are indicative of recession but should also lead to a fall in inflation.
- Businesses continue to have healthy balance sheets; employment remains strong with wages firming up and the housing market remaining steady. These provide a solid base for the economy to gain momentum again.
- We continue to find companies and funds on attractive valuations, so remain fully invested with an overweight to equity markets.
Inflation and the war in Ukraine.
We continue to have a number of crosscurrents to navigate this summer. The two biggest uncertainties facing global markets remain inflation and the conflict in Ukraine. Inflation is likely to be over 10% in the UK by year end due to rising energy prices and much of the western world could be in recession. With regards to Ukraine, Russia could be in a stronger position with Europe into the winter as they control a significant proportion of their energy supply.
So while we may have a choppy few months ahead, we should be reassured that much of this is already known by markets and so should be largely discounted. While the outcome in Ukraine is hard to predict, inflation is easier to discuss: markets are forward-looking, and so as soon as there is greater confidence of when inflation is peaking, then markets should start to recover from their current weakness.
Recession?
To gain an insight into how and when inflation should peak, we have been monitoring commodity prices closely. Most commodity prices are easing, for example wheat and corn are 30-40% down from their recent peaks and back to levels before the Ukraine conflict, while copper is down over 20% this year on fears of recession. Elsewhere oil is still up around 25% this year, although off its peak. These falls are indicative of recession, which would normally be a concern for equity markets, but they will also lead to the fall in inflation which is what markets are looking for to help rebuild confidence.
While a lot of caution is being priced into markets, and investor sentiment is at extremely low levels, it is also important to maintain perspective and remember the positives: most businesses and consumers continue to have healthy balance sheets, employment remains strong, wages are firming up and the housing market is steady. Even though we are all facing headwinds, these provide a solid base for the economy to gain momentum again.
Where we are now.
We continue to find equity companies and funds on attractive valuations, for example the broad FTSE All-Share index is on a forward price / earnings multiple of around 10x, yields almost 4% and many companies are buying back shares which enhance returns for shareholders. So we remain fully invested, with an overweight to equity markets and underweight bond markets. Portfolios remain evenly balanced to navigate possible further volatility and find the opportunities which continue to present themselves.
Important Information.
This article is for information only and does not constitute advice or recommendation and you should not make any investment decisions based on it. The views and opinions of this article are those of Casterbridge at the time of writing and may change without notice. Any opinions should not be viewed as indicating any guarantee of return from investments managed by Casterbridge nor as advice of any nature. It is important to remember that past performance and the value of an investment, and any income from it, may go down as well as up and the investor may not get back the original amount invested.
